Getting Started: Funding for a New Business

There is no doubt that when the market is busy, experienced and skilled individuals have a lot of opportunities to grow within the manufacturing industry. But, at least for some, the only way to truly grow is to start something on their own, so this month I thought it would be a good idea to talk about how an equipment lender will look at a startup business.

If you look at truly successful Canadian manufacturers, you can see that they often have common threads.

Some started out at the bottom, in many cases emigrated from another country, working as a low-level operator or apprentice.

Some have a very strong engineering background, or developed it on the shop floor, and honed it to a point where they eventually started running a plant.

Then they all came to the same realization: They could either continue to run someone else’s business, which for many is a secure and successful career, or make the decision to open their own shop.

This is no easy decision, when you consider having to operate within an industry that is unregulated and fiercely competitive, and when a few cents per part could mean the difference between winning or losing hundreds of thousands or even millions of dollars’ worth of business.

Then you must factor in that you will be competing with companies that who have a strong technical experience and inherent knowledge of how to make complicated parts or equipment, from a time, labour, and material perspective. If you don’t completely understand your product, how it works, and why it costs what it does, it will be a struggle to secure business and make money.

The Startup

Once the decision has been made to open a startup, you need to consider a lot of factors and create a solid business plan detailing where the new company will operate, startup costs, how much capital will be required to get the business running, and what the anticipated sales will be for the first few years.

Accessing Capital

A lot of planning will be required, but here I would want to focus on how to get financing in place for the necessary manufacturing equipment.

The normal inclination for a startup business is to minimize cost wherever possible, but when it comes to securing a lender for equipment, this may not be the best strategy.

The first thing any lender will look at is what is actually being financed. When it comes to machine tools, anyone with industry knowledge knows a good brand name machine tool has excellent resale value, which in this case is of the utmost importance.

A lender’s first concern is exit strategy. In the event the deal goes badly, they want a comfort level knowing the asset can be resold with relative ease and in a short period of time, recovering a significant portion of the loan.

Finance companies that concentrate in particular industries have in-house specialists that provide evaluations. In the manufacturing industry, this means they will look at a transaction, and if the equipment is a brand-named quality machine tool, they will know if the deal goes bad and the machine is resold the true or actual exposure is significantly less than the original selling price of the equipment.

Because any transaction for a new business requires a deposit from the prospective buyer, the risk is mitigated even further, but it is knowledge about the equipment that is the main difference between doing business with an alternative lender with industry experience and a traditional one such as a chartered bank.

When it comes to getting financing from a traditional bank, the quality of the asset, and in turn its perceived resale value, factors very little when the applicant is reviewed. This means the credit department will struggle to get this type of transaction approved.

The lender also will perform a review of the equipment seller to ensure it is reputable and can provide service and support for the equipment either as an authorized dealer or an experienced reseller.  It does nobody any good if the end user is unable to make product and therefore revenue because the equipment is obsolete or outdated to a point where spare parts and service are no longer available.

The lender also will review the personal credit of the prospective owner and shareholders of the new entity.

These personal reports provide a significant amount of information about the individual, including how long they have been on file, the number of trades, how much credit they have been extended by either credit card companies or their bank, and, most important, their repayment history.

These reports also provide information for any legal or collection issues.  It is important for any applicant to know what is on their credit report. If there has been any negative activity, it is shared upfront with the potential lender. This way there are no surprises and an explanation is provided at the beginning of the buying process.

Finding financing for a startup business can certainly be a challenge, but it is important to realize that it may not make sense to start with inexpensive equipment; for a lender that understands and values quality machinery, low-quality equipment may actually make them less interested in the transaction.